Four Reasons to Be Cheerful About UK Plc in 2026
The UK economy shows several encouraging signs as it heads into 2026, according to recent analysis. Chancellor Reeves has widened the headroom against the government's fiscal rules, reducing the chances of experiencing last year's fiscal turmoil again. Consequently, the upcoming spring statement is expected to be uneventful, and the Office for Budget Responsibility's forecast will not be used to assess compliance with these rules.
Economic indicators also provide grounds for optimism. The December flash PMI from S&P Global rose to 52.1, signaling expansion in the private sector. New business activity has strengthened to its highest level in 14 months, driven primarily by the services sector.
Support for spending is anticipated from several factors, including a likely Bank of England interest rate cut, a £150-a-year energy bills relief package, and the resolution of prolonged tax speculation. However, the Bank of England is expected to be cautious, with limited further reductions in rates.
Household financial behavior also offers a buffer, as the savings rate reached 10.7% in the second quarter of 2025, well above the long-run average. This indicates potential spending restraint if economic uncertainty persists.
Productivity improvements are evident, with output per worker up by around 1% in the first half of 2025. Early signs suggest gains in IT and possibly artificial intelligence-driven productivity enhancements.
Finally, policy changes related to National Insurance Contributions (NICs) and minimum wage adjustments could shift hiring costs towards investment in productivity-enhancing measures. The overall benefit of these policies will depend on how effectively the labor market can absorb workers who might be displaced by these changes.
